Finally, the Corporate Income Tax Law has been published on December 9th, 2022, providing essential rules to help businesses get ready before the implementation in June 2023. However, some important details will further be clarified via issuance of Cabinet and Federal Tax Authority Decisions and guidances.
Below are the main features of the new tax law.
Corporate Income Tax (CIT) will apply on Taxable Person’s adjusted accounting profit at the following rates:
- 0% on taxable profits up to AED 375,000
- 9% on taxable profits greater than AED 375,000
Corporate tax applies to all businesses which is defined as any regular activity including commercial, professional, industrial, and agricultural, in the UAE mainland and free zones.
CIT also applies to foreign non-resident businesses that have a permanent establishment in the UAE or have income accruing in or derived from the UAE. Foreign businesses could be considered as resident in the UAE if they are managed and controlled in the UAE.
Withholding tax at a 0% rate shall be applicable on UAE earned income by a foreign entity. Other withholding tax rates can be specified by a Cabinet Decision.
Businesses established in UAE free zones shall be subject to 0% tax rate on Qualifying Income if they maintain adequate substance in the UAE, otherwise, they will be subject to 9% tax rate. Qualifying income will be specified in a Cabinet Decision. Most likely, this will refer to the requirement of not conducting business with UAE mainland.
Individuals are subject to corporate tax to the extent that they engage in business activity. A Cabinet Decision will be published to specify the categories of Business or Business activity conducted by a natural person that is taxable.
The UAE corporate tax regime will apply to financial/tax period starting on or after 1 June 2023. Businesses with financial year from January to December will become subject to corporate tax starting 01/01/2024. However, anti-abuse rules apply from the date of publication of the law.
All businesses including businesses operating in free zones are required to file CIT return electronically within 9 months of the end of the financial period.
CIT applies on taxable income, which is reached after adjusting the accounting income based on CIT rules for deductible & non-deductible expenses.
Expenditure incurred wholly and exclusively for business purposes are fully deductible. Other expenses are subject to certain limits, such as, entertainment expenses which are deductible up to 50% of the expense amount, and interest expenses are deducible up to 30% of earnings (EBITDA).
Expenditure incurred in deriving Exempt Income, donations made to a non-Qualifying Public Benefit Entity, fines, bribes, and dividends are not tax deductible.
For CIT purposes, UAE resident businesses can form a Tax Group and treated as a single Taxable Person if the parent company owns 95% of shares or voting rights of the subsidiary, and both have the same financial year and accounting standards.
Free zone entities subject to 0% cannot enter into a Tax Group.
The CIT law include general anti-abuse rules that aims to identify any arrangement or transactions entered into for tax advantages only and which do not reflect economic reality or based on commercial reasons.
These anti-avoidance rules are already effective from the date of issuance of the CIT law, therefore, any ongoing or planned restructuring should be in compliance with this provision.
We highly recommend all business to assess the impact of the introduction of corporate tax early and proactively plan a successful implementation.
- Maintain proper accounting records and systems.
- Clearly identify all tax implications on your business.
- Establish mitigation strategies to reduce compliance cost, and achieve high tax efficiency.
- Identify the needs to change your operating model, tax function, and accounting system and standards, without violating the anti-abuse rules.
How can Audiix help?
Audiix will make every effort to help you with resources and updates that would assist you to be prepared for the new tax in terms of compliance and tax planning. if you have any question please feel free to email us at [email protected].
This information summary is provided for general awareness purposes only and is not intended to replace an accounting, tax, or professional advice. Please seek professional advice before making any decision. We assume no liability or responsibility for any errors, omissions, or inaccuracy in this content.